South-Western Legal Studies in Business

Class Certification Denied for Failure to Show Cause-and-Effect

District court refused to certify a request for class certification in a securities fraud case. The plaintiff failed to show cause-and-effect between corporate acts and changes in stock prices that would be related to the claimed losses.

Topic Securities Law
Key Words

Fraud; Fraud-on-the Market; Efficient Market; Class Action

C A S E   S U M M A R Y

A stock owner brought a class action suit against a company, contending losses due to fraud. The plaintiff requested the district court to grant class action certification to the suit.


Certification denied. Securities fraud, like all fraud, requires proof of reliance. If a person claims reliance on certain information in trading securities, it is unlikely it can be shown that all members of the class relied on the same information. The Supreme Court has recognized the fraud-on-the-market theory, which permits a rebuttable presumption that the plaintiff relied on "the integrity of the market price," which, presumably reflected misstatements or omissions by stock promoters or company managers. For the fraud-on-the-market theory to be a basis for satisfying the reliance requirement of securities fraud various factors are considered. The most important is usually the cause-and-effect relationship, over time, between unexpected corporate events or financial releases and immediate response in stock prices. Plaintiff fails to show that this was relevant to stock trades that took place over an eight-month time period, so the class cannot be certified.


In re Polymedica Corporation Securities Litigation, ---F.Supp.2d--- (2006 WL 2776669, D. Mass., 2006)

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